Litecoin founder Charles Lee on the origins and potential of the world’s second largest cryptocurrency

Charles Lee isn’t nearly as invisible as Satoshi Nakamoto, but he’s doing his best. The creator of Litecoin, the second most successful cryptocurrency after Bitcoin, was happy to speak with CoinDesk, but he didn’t want to reveal too much about himself. What we know for sure about the California-based software engineer is that he graduated from a leading technology-focused university in 1999, and is currently working for an Internet software company. CoinDesk knows who that is – and the odd reference can be found online by those who know where to look – but Lee really doesn’t like to talk about it.

The six-person team behind the altcoin is equally secretive. “They are people that I talked to over the years on IRC and other forums,” Lee says of the team, which communicates with the broader community through chat rooms and message boards. “Some of them don’t want their identities known.”

“People are always afraid of government intervention,” he says. “Cryptocurrency is such a powerful concept that it can almost overturn governments.”

Lee heard about Bitcoin two years ago, and almost immediately understood the significance of the idea. “I definitely think that what the Internet did to information, cryptocurrency will do to currency,” he says. Like many digital coin enthusiasts, he started mining bitcoin before getting into the altcoin scene.

First flirtations with altcoins

Around that time, an altcoin called IXcoin was launched. Still more appeared, and Lee decided to get in on the act, creating Fairbrix in September 2011.

Fairbrix was a clone of Tenebrix, an altcurrency created in 2011, but its launch was mismanaged. “The developer of the coin mined the coin, created seven million coins for himself and then launched it,” says Lee, arguing that a lot of people were wary of supporting it. “So there was community interest in creating a clone coin to make it more fair by having zero pre-mined.”

Fairbrix was Lee’s first flirtation with Scrypt as a proof of work function. Unlike Bitcoin’s SHA-256 function, Scrypt is designed to be CPU-friendly, making it more difficult for ASIC miners to control the network, and letting people who can’t afford expensive specialist hardware in on the act. Unfortunately, Fairbrix was a failure.

Part of the problem was a software bug. The client that Fairbrix used, called Multicoin, supported multiple coins. The bug stopped many of the initial Fairbrix blocks from producing coins. “Because of that, and also because it was 51% attacked from the start, the coin didn’t have a fair launch and it failed from there,” Lee recalls. These attacks are relatively easy to launch early on in a coin’s life, because there are often not enough miners to protect the network against control.

His next attempt at an altcoin was a success. He launched Litecoin in October 2011, combining code from the bitcoin client to eliminate the bug that helped to kill Fairbrix. There were some key differences to Bitcoin, however. Instead of having a maximum of 21 million coins, Litecoin had 84 million. It also incorporated the Scrypt proof of work from Tenebrix, designed to make mining more democratic.

Fair and transparent

Fairness is a frequent theme in Lee’s discussions about cryptocurrencies (which isn’t surprising, given the name of his first attempt). Proof of work algorithms play into this. “When bitcoin started, it was fair,” he says, because people could mine it profitably with CPUs. Then, as GPUs emerged, this became more difficult. “When Litecoin was launched it was CPU only. Then a year later, someone figured out that they can use GPUs to mine it also. That’s the current state,” he says, adding that he expects to see it move to ASICs in time. “Currently, some think that Litecoin is more fair because there’s no Litecoin ASIC but it may just be a matter of time,” he warns.

“For Bitcoin, the ASIC machines blow away the GPUs in terms of efficiency. But for Litecoin, the Scrypt algorithm won’t see as drastic a difference. You will eventually see it happen, though.”

It was his new approach to launching Litecoin, rather than the technology behind it, that made it less susceptible to 51% attacks. He launched the source code a week before announcing the genesis block that would begin delivering Litecoins to miners. During that week, he encouraged people to mine on Testnet (effectively a testing ground for altcoins, which doesn’t generate any rewards, or add blocks to a live chain).

“Because of that, a bunch of people built up hype around the coin, talked about how it’s fair, and based around bitcoin, had four times the coins, was a lot faster, and used Scrypt,” he said By the time he set up the genesis block, the hash rate was strong enough to make a 51% attack much harder.

A complementary relationship

Lee considers his relationship with the Bitcoin development team to be healthy. “We do talk every now and then to exchange ideas and help each other out. We’re on fairly good terms,” he says. However, culturally speaking, his altcoin has one significant advantage over Bitcoin.

“The bitcoin market is worth $2bn, so they don’t want to make any big changes that could lose them a lot of money. We are able to take more risk. Our community is smaller, so it’s easier for us to convince a large proportion of people to upgrade.” It’s harder for Bitcoin miners to do that, he points out.

“There are a lot of things that require a hard fork and Bitcoin is wary of that,” he explains. Consequently, the Bitcoin developers sometimes talk to the Litecoin team to see if it will consider an experimental feature for its altcoin, if they are unwilling to take the risk.

There are interesting features such as Zerocoin that could be added to the core Litecoin protocol, he says, but another often-lauded feature, coloured coins, isn’t on his immediate agenda.

Marking coins mathematically so that they can be used as tokens for other things such as physical property and stocks is an interesting concept, he admits. “But right now, it’s a bit too technical for the average person. Using bitcoin and litecoin to buy stuff online is complex enough,” he argues. “Adding coloured coins on top of that totally confuses people.”

In any case, there are other, more pressing features. The Litecoin team is presently considering smarter transaction fees. “Fees are pretty static right now,” Lee says.  Earlier this year, it adjusted its minimum fee from .1 LTC to .02 LTC, partly in response to the growing value of the coin. But he thinks that the transaction fees should vary with the value of the transaction. “We’re thinking about ways to make it smart, where the fees would reduce automatically,” he says. “That would be beneficial for merchants.”

Getting merchants on board

Merchant adoption is a holy grail for most altcoins. Until merchants begin using a coin ubiquitously, it’s hard to get it out of the speculation phase and into a cycle where it is consistently and widely circulated, with the liquidity benefits that this brings. Merchant adoption is directly linked to volatility – the more merchants that take a coin, the more it is spent. The more it is spent (and the more liquidity it has), the less volatile the pricing will be.

“The nice thing about us is that we’re very similar to bitcoin, so if merchants accept coins for merchandise, it will also be easy for them to accept litecoins,” he suggests. He’s happy to ride Satoshi’s coattails in the meantime.

“Litecoin is two years behind bitcoin in terms of our adoption, so it’s interesting to look into the future,” he says. “If we don’t screw it up, litecoin will follow on the coattails of bitcoin. There will be more merchant adoption, and it will become less speculative and more useful.”

One possibility is that bitcoin will be used for more expensive purchases, whereas litecoin will take up the microtransaction space, he suggests (which also explains his focus on variable transaction fees).

But before any of this can succeed, one of the critical features that litecoin needs is a good payment processor, he admits. “I have talked to a few groups of people that are working on litecoin payment processors.” Kojn (formerly LitePay) is one. There are other potential developments, too.

One big boost for Litecoin will be official support from Mt. Gox, which in spite of its recent travails is still the biggest altcoin exchange. In June, the exchange promised that it would explore Litecoin adoption for July, but it’s running out of time. In any case, this doesn’t mean that Lee is a fan of Mt. Gox. “Having one exchange that’s dominating everyone is bad for bitcoin, so I am not upset that Mt. Gox is losing its mojo,” he says. “Litecoin is becoming more popular and Mt. Gox has seen that they’re missing out on making money from litecoin, and that’s why they want to implement it.” Vircurex and BTC-E are among the exchanges that support Litecoin.

Those are some of his hopes for Litecoin. What are his fears? “There’s always a chance that I could screw up the code and cause major problems,” he says. Given his experience with software bugs and Fairbrix, he cracks this joke with an air of unease.

After all, the bug that brings his coin down need not come from him. “There was a bug in the Berkeley database that Bitcoin was using, and that Litecoin is using right now, and that bug makes it possible for the same client to hard fork,” he says. “It’s extremely unlikely but there’s a possibility, and if it happens it would be impossible for us to combine the two forks. That’s one of the major fears.”

This doesn’t keep him up at night, however. Nothing does, he says. Lee is working with his community and doing his best. At a market cap of 617540 bitcoins (at the time of writing) – second only to bitcoin itself – the dev team and the community that supports it seem to be doing rather a good job.

Image credit: cybrbeast